Here’s How to Profit From the Breakout in Arista Networks

ANET stock - Here’s How to Profit From the Breakout in Arista Networks

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Many try, but most fail when trying to transition from the new kid on the block to the big leagues of investing. One stock doing just that, however, is Arista Networks (NYSE:ANET). But if you’re bullish on ANET stock, going long a slightly out-of-the-money bull call spread still looks good. Let me explain.

This past Friday, cloud networking solutions outfit and relative market newcomer Arista Networks solidified its winning ways. Standard & Poors announced ANET stock would be the broad-based and large capitalization S&P 500 index’s newest constituent and replacing GGP Inc (NYSE:GGP) as of the open of trade on Tuesday.

Wall Street, of course, took quick notice and sent shares of ANET up more than 9% on the session as institutional and index investors, as well as other pros jockeyed for stakes in the company.

Not that it’s been a long time coming for ANET stock, but it would have been difficult for the S&P 500 to have turned a blind eye for much longer. The fact is, with a market cap of about $23 billion, consistent double-digit sales and earnings growth and taking market share from much larger rival Cisco Systems (NASDAQ:CSCO) with businesses like Microsoft (NASDAQ:MSFT) and Facebook (NASDAQ:FB) as marquee customers; Arista’s addition into the S&P 500 does appear well-deserved based on what the company is doing off the price chart.

ANET Stock Weekly Chart

Source: Charts by TradingView

On the price chart there’s little to suggest ANET isn’t going significantly higher in the weeks, months and perhaps years ahead. Shares broke out this past Friday from a fairly large corrective first-stage base of nearly seven months in duration. It’s a favorable situation for bulls, and its not ANET’s only support either.

Also technically backing shares is ANET’s relative newcomer status to the markets. Shares of Arista Networks debuted as an IPO just over four years ago. That type of youth, if history is any sort of indicator, favors continued support and gains for ANET stock as more and more investors pile into the up-and-comer looking to catch growth momentum off and on the price chart.

Arista Stock Options Strategy

Similar to when I last discussed ANET stock in mid-June, an out-of-the-money bull call spread for positioning long makes sense. With the expectation for higher prices and ‘just okay’ options liquidity, a vertical is a smart way to be bullish with limited and reduced risk and not taking on additional downside exposure.

Reviewing the options market for ANET stock, the Sep $315/$325 call spread for $3.50 with shares at $308.58 is favored. This vertical is actually tighter and closer to the money than our prior selection and still uses the September contract.

The reason for tweaking the strategy is due to less time on the calendar, but also due to appreciating Friday’s breakout as one which should produce decent upside gains over the next couple weeks and lead to the spread going in-the-money.

If we’re right, a profit of up to $6.50, or return of 185%, is possible at expiration above $325 in ANET stock. That requires a rally of just over 4% above the breakout of $311. 67 and is well within reach of a volatile trader like ANET out of this type of pattern.

And if we’re wrong? At the end of the day, just over 1% of the risk associated with owning shares of Arista Networks is at stake with this strategy. That’s nice insurance to have in place. Sure, it’s a bit of a tight leash as far as the calendar is concerned, but given the confirmation on the ANET stock chart, the position looks reasonable without having to worry to much about overstaying one’s welcome.

Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.

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